Current affairs

Middle-skilled jobs that once formed ballast of its middle class are vanishing, replaced by low-skilled, low-paid jobs

by Edward Luce

Last week, United States President Barack Obama went to Osawatomie,
Kansas, to kick off a more populist phase in his 2012 re-election bid.
"This is a make-or-break moment for the middle class," declared the
United States President, who chose the same venue that Teddy Roosevelt
used in 1910 to call for a new progressive era. "I believe that this
country succeeds when everyone gets a fair shot."

Saying
everyone should get a "fair shot" always makes political sense -
particularly at a time when US income inequality rivals that of Mark
Twain's Gilded Age. But it might have been a stretch for Mr Obama to
suggest the American middle class is facing a unique "make-or-break"
moment. In reality, the labour force has been polarising for most of the
last generation in a trend that has sharply accelerated since 2000.

America used to be exceptional. Post-war, it maintained lower
unemployment than the Europeans and a higher rate of jobs turnover,
enabling it to get away with more meagre benefits; "a fair day's work
for a fair day's pay" was within the grasp of most. That gave America a
booming middle class that until recently was the most important engine
of global demand.

No longer. Today, somewhat remarkably, US
joblessness is higher than in much of Europe. And the US consumer is
mired in high personal debt.

As the jobs crisis deepens,
so too does US political polarisation. Allegations of "class warfare"
are a staple of Washington debate. In contrast to the '60s, dominated by
protests for peace and civil rights, today's battles are economic. Yet
there are few signs that either policymakers or economists are closer to
finding answers.

THE 'MISSING MIDDLE'

Nothing Mr Obama has been able to accomplish since 2008 -
including staving off a second Great Depression and pushing through an
overhaul of the healthcare system - appears to have resolved that
underlying structural challenge. Indeed, the signs are that the problem
is intensifying. In the words of Mr David Autor, a leading labour
economist at Harvard University, the labour force is suffering from a
growing "missing middle".

In short, the middle-skilled jobs
that once formed the ballast of the world's wealthiest middle class are
disappearing. They are being supplanted by relatively low-skilled (and
low-paid) jobs that cannot be replaced either by new technology or by
offshoring - such as home nursing and landscape gardening. Jobs are also
being created for the highly skilled, notably in science, engineering
and management.

For the remainder of the workforce,
including college graduates, it is both increasingly hard to find a
secure job and tougher for those who do find jobs to be paid in line
with inflation.

Most people know that median US income has
declined sharply since the late '90s. Fewer are aware that real incomes
also fell sharply in the same period for those with degrees. Only those
with postgraduate qualifications, particularly PhDs, saw net gains (for
some, spectacular).

LONGER TO RECOVER

The jobs crisis has many worrying manifestations, of which three
are worth highlighting. Perhaps the most troublesome is the waning
dynamism of the market.

People used to describe the US
labour market as Schumpeterian, after the Austrian neoclassical
economist who depicted the cycle of "creative destruction". Jobs might
be lost rapidly in a downturn but were swiftly reallocated to more
productive sectors when economic growth resumed.

That is not now the case.

According to McKinsey, the consultancy, it took six months for the
US economy to recover its pre-recession jobs level after the 1982
downturn. Following the 1991 recession, that had risen to 15 months.
After 2001, it took 39 months - meaning that the economy required almost
the full business cycle to regain the jobs total bequeathed by the
previous one.

Following the Great Recession of 2008,
McKinsey forecast that the economy would take 60 months to reach the
pre-downturn jobs level.

That now looks optimistic. In
December 2007, the US economy employed 146 million people. Four years
later, it languishes at 140 million. At the current rate of job creation
it will take another two and a half years to regain 2007 levels -
taking the replacement cycle to as much as 78 months. This is
destruction minus the creativity.

Even that understates the problem, since in that time the population will have risen by more than 10 million.

FEWER ACTIVELY SEEKING WORK

"I know companies that employ senior engineers whose only job is
to find ways to reduce the headcount," says Mr Carl Camden, chief
executive of Kelly Services, a booming staffing agency based in
Michigan. "The name of the game everywhere is to reduce permanent
headcount and we are still only at the early stages of this trend."

The second problem stems from the first - America is employing a
decreasing proportion of its people. At the start of the recession, the
employment-to-population rate was 62.7 per cent. The rate is now 58.5
per cent.

Last month, unemployment fell from 9 per cent to
8.6 per cent. On the surface, this looked like a welcome leap in job
creation. In reality, more than half of the fall was accounted for by a
decrease in the numbers "actively seeking" work. The 315,000 who dropped
out of the labour market far exceeded the 120,000 new jobs.

According to government statistics, if the same number of people were
seeking work today as in 2007, the jobless rate would be 11 per cent.
Some have moved from claiming unemployment benefits to disability
benefits, and have thus permanently dropped out of the labour force.

Others have fallen back on the charity of relatives. Others still
have ended up in prison. In 1982 there were just over 500,000 in jail;
today there are 2.5 million - more than the combined population of
Atlanta, Boston, Seattle and Kansas City, according to the Economic
Mobility Project of the Pew Centre, a Washington-based think-tank.

LEAST PRODUCTIVE JOBS

Finally, a growing share of whatever jobs the economy is still managing to create is in the least productive areas.

Of the five occupations forecast by the Bureau of Labor Statistics
to be the fastest growing between now and 2018, none requires a degree.
These are registered nurses, "home health aides", customer service
representatives, food preparation workers and "personal home care
aides".

Manufacturing is nowhere in the top 20, and such
jobs cannot replace the pay and conditions once typical of that sector.
"The food preparation industry cannot sustain a middle class," says Mr
Dan DiMicco, chief executive of Nucor, one of America's two remaining
big steel companies, whose company motto is "a nation that builds and
makes things".

The tides are not with Mr DiMicco. According
to a study this year by Mr Michael Spence, a Nobel Prize-winning
economist from Stanford University, and Sandile Hlatshwayo, all net job
creation since 1990 has been in the "non-tradable sector". Between 1990
and 2008, the US added 27.3 million jobs, of which almost every one was
in services. Almost half were in healthcare or the public sector - both
areas in which productivity growth is virtually zero. Conversely,
manufacturing's impressive productivity growth has tracked its shrinking
headcount.

If there is an explanation as to why
middle-class incomes have stagnated in the past generation, this is it:
Whatever jobs the US is able to create are in the least efficient
sectors - the types that neither computers nor China have yet found a
way of eliminating.

That trend is starting to lap at the
feet of more highly educated American workers. And, as the shift
continues, higher-paying jobs are also increasingly at risk, argue Prof
Spence and Ms Hlatshwayo. LITTLE CONSENSUS ON REMEDIES

What, then, can be done to revitalise the increasingly sclerotic jobs market?

If the answer were simple, it would have been on everyone's lips a
long time ago. Unfortunately, there is no precedent for the challenges
America faces, and thus little consensus among economists or
policymakers on the best remedies. However, almost everyone agrees on
how to ensure the situation does not deteriorate. Top of the list is a
better education system for all stages of life.

Alas,
rebooting an increasingly mediocre school system is easier said than
done. Nor is permanent reskillling realistic for large chunks of the
workforce. There may be lessons to be learnt from nations such as
Germany, particularly on vocational education, but there is little
federal appetite to apply them.

"Every American is going
to have to get used to the idea of a completely different work style,"
says Mr Camden, whose company farms out hundreds of thousands of
temporary workers around the world, from lawyers to office assistants.
"What you learnt in college five years ago may already be obsolete."

Perhaps inevitably, given the fiscal climate, education and
training budgets have gone in the wrong direction in the past few years.
Public schools and vocational community colleges derive much of their
funding from local property taxes. That model brings two big
disadvantages.

First, it means community colleges are
victims of "zip code apartheid" - the lower the property values in an
area, the less money there is to train the workforce or educate the
children.

Second, it deprives communities of the fiscal
stabilisers that they need during a prolonged home foreclosures crisis.
The areas worst hit by the housing crisis have experienced some of the
steepest education cuts. By contrast, some of the best community
colleges have kept their heads well above water.

But most
budgets have taken a nosedive at a time when demand for retraining has
surged. "It is absurd that we withdraw support from the community
colleges just when they most need it," says Prof Autor.

Economists also agree on the need for a panoply of other measures - from
higher spending on infrastructure, with the quality of roads and
airports now rapidly approaching second world status, to a more sensible
immigration policy that encourages the most talented foreign students
to remain in the US.

Most also call for far higher public
spending on research and development, as well as better private
incentives. The US now has one of the least generous R&D tax credits
in the developed world.

Taken together, these reforms
would have an impact - but few believe they would transform the picture.
"The truth is that we don't know how to fix the US labour market - we
are in uncharted territory," says Mr Peter Orszag, Mr Obama's former
budget director, now a vice-chairman of Citi.

"It would
help to spend more on retraining and on infrastructure and to have a
more rational immigration system. But these would not transform the
situation for the middle class. It is not yet clear what could."